Jan. 24, 2020

Late last year, the U.S. Energy Information Administration (EIA) issued a report noting that the flaring and venting of gas has skyrocketed in Texas and North Dakota. As detailed in the report, these two states accounted for 1.1 Bcf/d, or 82% of the reported U.S. vented and flared natural gas in 2018.

After the EIA issued the report, there was some concern that these two states may begin to crackdown on the flaring problem. Today, we look at the regulatory environment in both states, with an emphasis on North Dakota, but also provide an update on the process New Mexico is using to get a handle on the same issue. Interestingly, even though New Mexico does not appear to have as much of a problem, it appears to be the one state most likely to take action in the near term to address the issue. 

As we discuss below, if North Dakota regulators crack down, the impact would not be the same among the top 10 big well owners, because some, such as Oasis Petroleum, Burlington Resources and XTO Energy, are capturing more gas than other well owners, such as Whiting Oil and Gas, Marathon Oil and Bruin E&P.

North Dakota

North Dakota tried to get ahead of the flaring problem in the Bakken basin by putting gas capture rules in place that slowly reduced the amount of flaring allowed from 26% in 2014 to 12% for 2020 and dropping to 9% this November. However, the regulations are not really designed to create a strong incentive to reduce flaring. 

The regulations state that they are designed to provide operators “maximum flexibility to manage their drilling, operation, and gas capture plans within the gas capture goals.” Thus, the standards are applied statewide, then at the county level, field level, and finally at the well level for each operator. The enforcement mechanism provides that if the operator is unable to attain the gas capture goals, wells (presumably those not meeting the goal) will be restricted to 200 barrels of oil per day if flaring is less than 40% of the gas produced by that well, or restricted to 100 barrels of oil per day if the well is flaring more than 40% of the gas produced. 

This structure means that the regulations do not apply at all to any well that is producing less than 100 barrels per day because the restriction would never be enforced. Those wells producing between 100 and 200 barrels per day would only be impacted if their flaring was greater than 40%. So the real wells at risk of a reduction in production are those producing more than 200 barrels a day.

Using the November 2019 monthly report issued by the Oil and Gas Division of the North Dakota Industrial Commission, we separated the over 15,000 wells found in that report into these three classes: less than 100 bpd, 100 to 200 bpd and over 200 bpd. 

20200124 Flaring Wells

As can be seen, the vast majority of wells are producing less than 100 bpd, which means they essentially are not regulated under the state’s flaring goals because no matter what percentage of gas they might be flaring, they would not be impacted by the production limits imposed as the enforcement remedy under the regulation. Interestingly, even though the state report shows that, overall, 17% of all gas produced in November was flared -- which far exceeded the state’s goal of 12% -- those wells producing less than 200 bpd and those wells producing less than 100 bpd reported, on average, a flaring percentage of about 13%, which is far closer to the state’s goal. 

That means, of course, that those wells producing more than 200 bpd, which represent more than 40% of the state’s crude production, are also those that are greatly exceeding the state’s flaring limits. Our calculations show these much larger wells are flaring almost 21% of the gas they produce, but that ratio is very uneven among the operators of those wells.

20200124-2_Flaring chart two

The chart above provides the data for just the top ten operators of these larger wells. As can be seen, some operators are doing much better than others at capturing the gas they produce. If North Dakota were to begin a strict enforcement, which does not seem likely, the impact would be less on those that are close to meeting the current standard and have wells that are mostly in compliance.

In addition, the director of North Dakota’s Oil and Gas Division pointed to the startup of Oneok’s Elk River NGL pipeline in mid-December as a development that should lead to a greater capture of natural gas in the state. Perhaps some of these larger producers are connected to that pipeline and will improve their capture rates in the near future.

Texas

Since our last update on Texas in Gas Production Under Review -- Even In States With Traditionally Favorable Views , not much has changed with regard to flaring. Commissioner Sitton, the only one of the three commissioners of the Texas Railroad Commission up for election in 2020, has spoken about the flaring issue publicly and does not appear to be bowing to pressure for Texas to tighten up its flaring regulations. He has noted that only 2% of gas produced in Texas is flared. While the EIA agrees with that number, it is somewhat misleading because it includes in the denominator all of the gas produced from fields whose sole purpose is to produce gas. The percentage of flaring occurring in the crude production fields is undoubtedly much higher. In addition, Commissioner Sitton stated that the lawsuit by Williams, which we discussed in that Insights, is an anomaly unlikely to repeat again and should not be interpreted in any manner as an indicator of the state’s tolerance for flaring. So we will need to continue to watch the Williams suit and the elections in Texas.

New Mexico

In Gas Production Under Review -- Even In States With Traditionally Favorable Views , we also discussed the process that New Mexico is undertaking to address methane emissions in general, including flaring. Since that Insights, New Mexico’s Methane Advisory Panel released its draft technical report, which is open for public comment until February 20, 2020. Fifty-six pages of this 300-page report address flaring and provides a proposed “path forward.”

The proposed “path forward” is, in reality, a list of 23 suggestions that are open for comment and which range from improving the reporting requirements on flared gas to a number of proposals that could impact crude production in the state.

And while these are proposals and not yet regulations, we would expect there to be some action at the end of the process being followed in New Mexico to help rein in the flaring in that state. We expect at least one, if not all of the proposals discussed below to be adopted, which will likely impact the continued growth of crude production in that state. A key result of such actions may be to make the Texas portion of the Permian more attractive, which could exacerbate the flaring problems in that state.

Gas Capture Plan

The proposal is to issue a regulation that would require an applicant for a permit to drill to include a gas capture plan as part of that application and to require the approval of that plan before the permit to drill is issued. 

Overall Cap on Flaring with Real Enforcement

This proposal sets an overall limit (with no exceptions) on the gas flared by each operator. These limits would then be enforced through a fee for each mcf of gas that is flared or vented above the capture standard. There was a lot of discussion in the report about the inadequacy of the enforcement mechanism in North Dakota which should be avoided in New Mexico. To be efficient, the proposed penalties would be based on the reports filed monthly with the state and be sufficiently high to outweigh any financial incentives to flare rather than capture.

Assess Severance Tax and Royalty Payments on Gas Produced

The proposal is to assess a severance tax and royalties on all gas produced, rather than only on gas sold. Along with the penalties discussed above, the idea is to make capture more economically beneficial than flaring.